Irvine Firm to Tighten Home Loan Policies

Times Staff Writers

Signaling potential trouble in the home loan business, New Century Financial Corp. warned Friday that it would raise the rates it charges borrowers and cut back the number of riskier interest-only loans it approves.

The Irvine-based lender slashed its earnings forecast for the second time in two months and said its losses related to Hurricane Katrina “could be significant.” Its shares sank $3.95, or 10%, to $35.

Shares of other mortgage lenders also fell. Analysts say the mortgage market has been saturated with new lenders in recent years as relentlessly low mortgage rates have fueled demand for home purchases and refinancings. The price battle, they contend, has reached a level at which many companies may no longer be able to compete and still make money.


“Weaker players in the market will be forced to pull back and raise pricing, or risk substantial earnings and liquidity problems,” Robert Napoli, an analyst with Piper Jaffray & Co., wrote in a note to clients Friday.

Napoli downgraded New Century’s stock to “market perform” and said it was just such profit pressure that was needed “for the inevitable shakeout in this sector to take place.”

New Century specializes in the so-called sub-prime loan market for people with credit problems or other issues that prevent them from getting lower-cost prime loans. Like most lenders, it bundles many loans and sells them to investors in the mortgage-backed securities market.

The mortgage industry as a whole has been hurt by the Federal Reserve’s credit-tightening campaign, which raises lenders’ short-term funding costs. The sub-prime sector faces an even greater challenge, analysts say, because investors in mortgage-backed securities have effectively lowered the prices they’re willing to pay for riskier mortgage loans. As interest rates rise, investors figure that more high-risk borrowers will have trouble paying their bills.

Last week, Irvine-based Option One, the sub-prime lending unit of H&R; Block Inc., said it would hike the rates on its loans. Washington Mutual Inc. has alerted mortgage brokers that it plans to raise the rate at which borrowers can qualify for certain nontraditional loans.

After Friday’s announcement by New Century, shares of other lenders in the sub-prime market also fell. Accredited Home Lenders Holding Co. of San Diego dropped $1.91 to $35.66, and ECC Capital Corp. of Irvine fell 27 cents to $3.58.

Countrywide Financial Corp. of Calabasas, which has a sub-prime unit called Full Spectrum, declined $1.23 to $34.02.

New Century has been among the most aggressive on pricing, along with its top rival, privately held Ameriquest Capital Corp. of Orange. Just recently, however, New Century has had a harder time selling its loans at sufficient profit, its executives said Friday.

“Recent trends in interest rates, coupled with concerns over housing prices, energy costs and other inflationary pressures, have caused a significant deterioration in the secondary market for loans, causing our projected operating margins to fall to unanticipated levels,” Chief Executive Robert Cole said.

New Century had a record month in August -- originating $6.1 billion in loans, nearly double the amount of August 2004, making it the No. 2 sub-prime lender behind Ameriquest.

About 25% of New Century’s business is in interest-only loans, which are popular with consumers looking to buy homes in expensive markets such as California because they help keep monthly payments low for a fixed period of time. But lately, as interest rates have started to tick up and home prices continue to rise, doubts have arisen about borrowers’ ability to afford such mortgages.

New Century said it would work to reduce the number of interest-only loans it approves, by increasing the price and by introducing a 40-year fixed mortgage, said Ed Gotschall, the company’s finance chief.

“What that means is we want more of the product we like and less of the product that doesn’t price very well,” Gotschall said.

New Century said it expected 2005 earnings per share in the range of $7.25 to $7.75, down from an earlier forecast of $8.25 to $9.

The company also said it would maintain its dividend guidance at $6.50 and $7.30 for 2005 and 2006.

Founded in 1995, New Century was one of the few firms to survive a late-1990s shakeout of sub-prime lenders triggered by turmoil in financial markets.